New Industrial Unit in Himachal Pradesh and Uttaranchal

[Dinesh Kumar Agrawal]

Notification No. 50/2003-CE dated 10.06.2003 ('the Exemption Notification') exempts duty of central excise on the clearance of goods from the industrial units situated in the Uttaranchal and himachal Pradesh with a view to promote industry and employment in those states.

The exemption contained in the Exemption Notification is available, as per condition 2 thereto, to the following kinds of units situated in the notified areas in the Uttaranchal and himachal Pradesh:-

(a) New industrial units which have commenced their commercial production on or after the 7th day of January, 2003;

(b) Industrial units existing before the 7th day of January, 2003, in areas mentioned in Annexure-II, but which have undertaken substantial expansion by way of increase in installed capacity by not less than twenty five per cent, on or after the 7th day of January, 2003.

The expression 'New Industrial Unit' has not been defined in the Exemption Notification. Therefore, it is not clear as to whether:

1 New Industrial Unit may be established by old/second hand machine or it should have new machines only

2  Shifting of existing industrial unit from other states to notified area in the state of Uttaranchal can be considered as New Industrial Unit

3  Mere change in the ownership and/or re-location of unit to the designated area from un-designated area in the state of Uttranchal can be considered as New Industrial Unit

Hon'ble Supreme Court has examined the scope of word 'New Industrial Undertaking' in the case of Commissioner of Central Excise vs North East Tobacco Co Ltd [2002 (146) E.L.T. 490 (S.C.)]= [2006 -TMI-753-SUPREME COURT OF INDIA]. In that case, apex court was examining the scope of New Industrial Undertaking under the exemption notification 32/1999-CE dated 08.07.1999 which is pari materia with the present notification. Apex court observed that:

"9. The Exemption Notification nowhere defines the words "new industrial units". The object of Exemption Notification is obvious. It intends to encourage capital investment and establishment of industrial units in specified North-Eastern States for the purpose of increasing production of goods, promoting development of industry and employment in the said regions. In the case of Hindustan Aluminium Corp. Ltd. v. State of U.P & Anrs., 2008 -TMI - 41381 - SUPREME COURT OF INDIA, this Court emphasised that the Notification issued under the Act, "should not only be confined to its grammatical meaning or ordinary parlance but it should also be construed in the light of the context". It was reiterated that the "expression should be construed in a manner in which similar expressions have been employed by those who framed relevant notifications".Therefore, there is a "need to derive the intent from a contextual scheme".

10.The another important principle of interpreting an Exemption Notification is that as far as possible liberal interpretation should be imparted to the language thereof, provided no violence is done to the language employed. See State Level Committee v. Morgardshammar India Ltd. [1996 (1) SCC 108].

11. In the case of Morgardshammar India Ltd. (supra), Section 4(A) of the U.P. Sales Tax Act contained definition of 'new unit' for availing exemption from payment of sales tax. Explanation below Section 4(A) of the U.P. Sales Tax Act defined 'new unit' to mean a 'factory or workshop whether set up by a dealer already having an industrial unit manufacturing the same goods at any other place in the State or adjacent site' but excluded "any factory or workshop using machinery, accessories or components already used or acquired for use in any other factory or workshop in India". In the present case, no such definition or explanation is to be found in the notification and there is no material to establish that the same machinery, accessories or components used by the company in its unit at Bangagarh have been shifted for its unit at Amingaon, Guwahati.

12. In the case of Shri Bakul Oil Industries v. State of Gujarat 2008 -TMI - 41826 - SUPREME COURT OF INDIA, the notification for exemption from sales tax under consideration was issued under the provisions of Gujarat Sales Tax Act and in the notification 'new industry' was defined to mean and include an industry commissioned during the period 1st April, 1970 to 31st March, 1975 but the exclusion clause clearly read as : "but shall not include such industrial undertaking established by transferring or shifting or dismantling an existing industrial unit".

13. In the case before us, the Exemption Notification does not define 'new industrial units ' to exclude from its ambit units which are shifted or transferred from one location to another.

14. In the present case as we have found above, there was no material before the Department that pursuant to the Disinvestment Agreement with AIDC, the unit of the company at Bangagarh which was closed in 1994 was shifted to the new location at Amingaon, Guwahati."

In Para 13 of the judgment, observed that the Exemption Notification does not define 'new industrial unit' to exclude from its ambit units which are shifted or transferred from one location to another, which implied that units setup in the designated area by shifting or transferring from one location to other location will be eligible for the benefit. However, in the same judgment at next Para 14, it was further observed that new unit was not result of shifting. Therefore, confusion remains as to whether Para 13 and 14 are to be read together or Para 13 is independent of Para 14.

Central Board of Excise and Customs ('the Board') has issued a circular No. 772/5/2004-CX., dated 21-1-2004 clarifying the scope of substantial expansion by way of increase in installed capacity by not less than 25%. It was clarified that:

a) Increase in installed capacity of an existing unit by not less than should be the result of installation of additional plant and machinery. Any 25% increase in the installed capacity by means other than installation of additional plant and machinery would not qualify for the benefit of exemption under "substantial expansion".

b) As substantial expansion is defined in terms of increase in installed capacity by 25% or more, value of investment in plant and machinery is not the criteria to define substantial expansion. So long as additional installation of plant and machinery results into increase in installed capacity by not less than 25% quantum or value of investment in plant and machinery is not very material in deciding the criteria of substantial expansion.

c) There is no bar on use of second hand machinery for undertaking substantial expansion so long as it enhances the existing installed capacity by not less than 25%. What is relevant is the increase in installed capacity by not less than 25% by way of additional installation of plant and machinery.

d) The term substantial expansion is not defined in terms of original or depreciated value of plant and machinery. The only criterion to be satisfied is accretion in installed capacity by at least 25% with additional plant and machinery.

investment in plant and machinery for modernization or for e) Additional improving the quality of existing products, unless it leads to increase in installed capacity by 25% or more, would not tantamount to substantial expansion.

is no bar on use of It can be seen that, as per above clarification, there second hand machinery for undertaking substantial expansion covered under the condition 2(b) of the Exemption Notification . There is no explicit bar in the condition 2(a) of the Exemption Notification on use of second hand machines. Hence, it appears that a new industrial unit can be set up by installing either new or second hand machine.

Similarly, in absence of specific embargo on shifting of units from other state to Uttaranchal also will be considered as New Industrial Unit for the purpose of the Exemption Notification. However, it is pertinent to mention that Comptroller and Auditor General of India (CAG) has recently floated a survey to determine as to how many such units have been shifted to Uttranchal and Himachal Pradesh to avail the benefit of the Exemption Notification, and survey may result in some unexpected amendments in the Exemption Notification with or without retrospective amendment.

On the other hand, it appears that mere change in the ownership and/or re-location of unit to the designated area from un-designated area in the state of Uttranchal cannot be considered as New Industrial Unit. As observed by the apex court in the case of North East Tobacco Co Ltd 2006-TMI-753-SUPREME COURT OF INDIA], the Exemption Notification intends to encourage capital investment and establishment of industrial units in the specified areas of the state of Uttaranchal for the purpose of increasing production of goods, promoting development of industry and employment in the said regions. The shifting of existing units from un-designated area to the designated areas will not bring any new capital investment or employment to the state of Uttranchal, although, it will enrich the designated area at the cost of impoverishment of other areas of the state of Uttaranchal which is not the intent of the Exemption Notification. Similarly, mere change in the ownership does not bring a new industrial unit.

In this regard, it is pertinent to state that for the purpose of Income Tax Exemption, use of second hand machine on which depreciation has been taken or setting of a new unit by splitting or transferring of existing unit is not allowed.

As there are conflicting situation regarding use of second hand machines and shifting of plants to the notified areas, a caution is advised to the prospective investors.